The quality of the fees earned by your firm is a top priority as you scale and exit. All revenue is not good revenue. Poor fee quality leads to poor margins. On this episode, Phil Alves, CEO at DevSquad, shares how he improved margins and fee quality by repositioning his firm.
TRANSCRIPT
Greg Alexander [00:00:15] Welcome to the Pro Serv Podcast with Collective 54, podcasts from founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated entirely and exclusively to helping you grow, scale and someday exit your professional services firm. My name is Greg Alexander. I’m the lucky founder of this group, and I’ll be your host today. And on this episode, I’m going to talk to you about improving your margins and how the importance of that changes over time as you develop your firm. And we’re very lucky to have a great role model with us. He is a collective 54 member. His name is Phil Iles, and he’s going to share a little bit of his perspective with you. So, Phil, it’s great to see you. Thanks for being here. And please introduce yourself and your firm to the audience.
Phil Alves [00:01:13] Yeah, it’s great to be here. Yeah. So my firm is Dev Squad. We specialize in building SaaS products, and I’m feel I’m the CEO of the firm.
Greg Alexander [00:01:23] Okay, very good. And how long you guys been at it?
Phil Alves [00:01:25] Eight years.
Greg Alexander [00:01:27] Eight years. Very good. And your journey? Are you a software engineer yourself turned entrepreneur, or did you come at this from some other way?
Phil Alves [00:01:34] No, that’s it. Yeah, I started as a soft engineer. From their eye. They love product to the product side of yeah. Like creating things and solving problems. And I moved to Utah. I am originally from Brazil. I got a lot of job offers. I decided I would start this company. Of course, having the connection to Brazil helped me have access to talent that wouldn’t be too expensive and interest to the market. And I was part of the first thing they help us have like higher margins. Yeah, but, but a lot of other things that we did after that.
Greg Alexander [00:02:09] Yeah. So let’s jump into that. So the topic today is margins. And I would say the the space that you’re in which I’ll broadly categorize maybe incorrectly as software development tends to be in relation to other professional services, tends to be profitable but not as profitable because software engineers are scarce, they’re in great demand and the labor cost in this space tends to be high and the end client is squeezing fees a little bit. So margins in software engineering tend to be a little bit low. But in your case, that’s not true. So what are you doing to deliver exceptional margins?
Phil Alves [00:02:49] Yeah. So I believe, like you talk about in the book, it cannot be a body shop. You have to when clients come to us, what they’re buying, they’re buying process, they’re buying our culture. So we were very specific about how we do stuff. We do stuff differently. We made it. And then as we keep doing that, we were able to prove that we can do it in a better way than they will be able to do just themselves. So when they hire us, I’m like, You’re not hiring developers, you’re right. But I’m trying to position myself not just as another software development company, but I’m trying to position myself as a consulting firm. They specialize. I have my own way of doing things, and my way is better than you could do by yourself. And you’re going to pay a premium for that. And another thing they like to say, when people are paying us their opinions to tell them what to do, not the other way around, like we are really the experts. And like I think another thing that’s very important for our margins, so we start like kind of like in a platform play, people would hire us because we’re experts in a certain programing language, but we had to move out of that to, to charge more money, you know. So now people hire us because we own a vertical. Our vertical is like we specialize in building SaaS products. We have with a lot of successful SaaS products where people went and have exits. So it’s about you can be selling just the people, just the bodies. You have to sell process and you have to be in a vertical where there’s enough margin for people where people are going to pay for the expertize.
Greg Alexander [00:04:25] Okay. So there was a lot there. I want to unpack that a little bit and congrats to you for having clear command over this subject. I think some of our listeners might not be as advanced, so let’s go slowly here. So one thing you mentioned to me, I call it positioning and you’ve positioned yourself as a consulting firm that specializes in software development as opposed to a software development firm. And that move alone gets you into a different category and it gets the client willing to pay a different fee because they’re comparing you to other consulting firms, which tend to charge more and it gets you out of that category now. And we’re going to go through the other ones that you just rattled off. Well, let’s stay with that one for a moment. Sometimes when you try to reposition yourself in such a way, the client says, give me a break. You know, you might be trying to reposition yourself as a consulting firm, but you’re not really a software development firm. So how did you overcome that perception and how did you convince the world that you really are a consulting firm?
Phil Alves [00:05:22] I think it’s like actually when you are coming up, you’re going to have some customers that you’ve actually got to do consulting and other companies way of actually doing development. And the more of those customers that you actually doing real consulting, it’s the more a track record that you can show. So we are to a point right now that when I meet with a customer, I explain to them, Look, when you hire us, you get a product manager, you get a UI designer, you get a playbook of how we do stuff. And that was developed over the years. So we didn’t start here. Sometimes we did to customers that were less than ideal, but as we kept growing, we just kept getting more and more picky about our customers. If the customer doesn’t believe what I’m trying to sell him, I’ll be like, You’re not a fit. Because at this point we have a funnel. And like last month alone, I had 40 people that reach out to us and then they came back. And if they don’t, if they don’t, it becomes a peaking game. And some people don’t believe or like they don’t. That’s not why they are buying. And that’s okay. We have the software people that are what we are. Sally Yeah.
Greg Alexander [00:06:26] I mean, just a great demonstration of sticking to your ideal client profile, you choosing who you’re going to work with, people that recognize your value and are willing to pay for it. I’m sure there was a time when you were coming up in the early days that you couldn’t pick, you know, all revenue was good revenue. You had to turn the lights on and pay the employees. When did that happen? When did the when did the paradigm shift to where you you have a just a huge funnel and you get to choose who you want to work with.
Phil Alves [00:06:57] I think like when the money was coming and I invest that money in building that funnel, in building the positioning, and it changed when I realize that we’re going to get leads no matter what it like my pay per click and my CEO are delivering what they’re supposed to deliver. And then when I could trust that this I’m going to get customers. That’s when I start to change. And then we can start to replacing. We have customers that work with us maybe for a long time, but there was no ideal customer and then we just replace those customers for your customers. But I think it’s about putting your money in, investing your money in creating the channels and creating the positioning so you can be where you want to be.
Greg Alexander [00:07:37] Okay, so let’s talk about investment. So sometimes founders of boutique process firms, they see excess money in the bank account and the temptation is too strong. They pull it out of the bank account, buy a new car or something like that. You didn’t do that. You kept the money in the business and reinvested it in these ways, which ultimately resulted to where you are today, which is a very successful, thriving firm. So how did you how did you overcome that temptation and how did you resist the urge to build a lifestyle business and decided to really go for it?
Phil Alves [00:08:09] Actually, I read a book called Profit First, and I had some money that I took out, and then that money I could do whatever I want. So I did buy a nice car.
Speaker 3 [00:08:19] A Porsche. I didn’t want an airplane. I have look a lot of it, but most of the.
Phil Alves [00:08:24] Business, the money actually stay in the business and they got to reinvest that money on the business. So it was about having processes like the same way they have a process of how we run the business like fulfillment. I had a process about what I’m going to do with this money and I was only a small portion and it gets smaller as the company get bigger, you know. But there was only a small portion of that money that would go around us play money because you still want to get the rewards of what you were doing. And it was just about sticking to that process. They allowed me to have the money to reinvest in the business.
Greg Alexander [00:08:56] Very good. When I asked about margin improvement, the first thing you said was not being a body shop. And when somebody hires you, they’re not hiring an extra pair of hands. They’re hiring process, playbook, culture, which is a really compelling package. I’m assuming because the margins are where they are, that you’re able to charge a premium and that your target customer is paying a premium for process, playbook and culture. And that’s why that’s why I not the Body Shop. So how were those things developed? How have you protected them? How do you prevent your competitors from stealing it?
Phil Alves [00:09:40] I think it’s very hard to steal culture.
Greg Alexander [00:09:42] Yeah, that’s true.
Speaker 3 [00:09:43] Yeah, good point. You know.
Phil Alves [00:09:47] And that’s kind of like the thing that we from day one, I really emphasize the culture that we want to build and how we want to be. And they have different interactions, like we improve their culture. One thing they really help us do, we start with us. As we grew in the US does cover culture, the covers process, they have ways that you can use to implement those like. So like the same way basically I didn’t try to reinvent the wheel. I read a lot of books. I found processes that work, including your book, and I just replicate it.
Greg Alexander [00:10:21] Yeah. Okay, very good. And tell me a little bit about your culture. And I know iOS covers culture and it suggests how to build it and track it. But each company has its own unique culture. And you’ve mentioned that word so many times here. And in the context of profit and margin expansion, I don’t often hear the word culture, so I’m intrigued by this. Tell me about your culture and how does it contribute to your success?
Phil Alves [00:10:49] I believe that the teams that build amazing software products regardless, it’s not because of the talent, it’s because of the culture the team has. So the team, the culture that we develop is a culture that we say make it happen. Simplicity, we are about simplicity. So we want to be very simple play as a team and the value of your expectations. Those are our four values. We talk about them all the time. We have a lot of softness to the track and people can rewarded or people for keeping the values. When you’re making decisions inside the company, you make decisions based on those values. And I think the biggest one, it’s like make it happen in simplicity. We want to keep it simple and to get things to to the other side and get it done. And like, for example, we work with ADP, big Fortune 500 company. And the way the ADP, this thing you can, they overcomplicate everything. So they come to us and they’re like, wow, you got this done in six months. We had expected doing two years. It is because our culture it I could get the same people to work for ADP but inside my system, my process is if they follow how we work, they also would get the process done in in six months. So like I like to say, culture is the way that we do things around here. And that’s kind of like what we try to to pass down and to always talk about and to develop. And sometimes we have to understand we get bad things about our culture to cultures like how we do things. It’s not only the good things. So like recently we have a lot of people in Brazil or I’m originally from and people are showing up late, late to meetings because that’s part of Brazilian culture. Like you show up late and I’m like, That’s not acceptable. And then we, we correct the things inside our culture. So it became a high performing culture, you know. So yeah, yeah.
Greg Alexander [00:12:34] Now one of the things that you talk to your leadership board about recently was. The the push pull between or the the tension between doing really good work for your current clients, which obviously is very important in taking on new clients. And at some point and this happens to all of us, you have to do more of one or the other. So how do you decide? And how do you balance those two? You know, decide when to take on new clients, when not to take on new clients, when to focus on the existing clients that you have. How do you how do you think through that?
Phil Alves [00:13:10] Yeah. I think it has to be. Do I have the leadership inside my company ready to onboarding new customers? Do I have the customers inside the idea of customers all happy? Because there’s no point in losing the customers that I have just to onboard some new big customers. And we have been growing a lot year over year, but frequently I’m going to be like, we are not taking customers this quarter and we able to sometimes get people to put a deposit down and then start the next quarter. And I was the first time someone paid me a bunch of money not to work. I was like, What?
Speaker 3 [00:13:48] You went out and bought a plant? No, but I played. That’s funny.
Phil Alves [00:13:54] So. But it’s kind of like it is how we work right now. It is. Because if I’m not a body shop, I have to have the time in the consulting. You get the people from down the pyramid, move them down to management. And if I don’t have that person training it, it’s about having the actual leadership ready to onboard customers and add value to understand their culture and understand their playbook. And sometimes I cannot develop these people fast enough. If that’s the case, I have to wait. I’m taking your customers. Yeah.
Greg Alexander [00:14:25] I tell you, that’s a that’s a great problem to have. I mean, you have so much work. The limitation isn’t finding clients. The limitation is developing the talent quick enough. Speaking of talent, you mentioned that you’re from Brazil, but you live in Utah. Is your talent spread out all over the place or is it in one location? Do you use a remote workforce? Does people come to the office? How does it work?
Phil Alves [00:14:47] Yeah. So how about after you had a remote first culture? There’s about ten people that live in Utah. They come to the office if they want to. We do have customers fly here for us to do some workshops. We call the design sprints, so the workshop sometimes will happen in person, but most of our work is remote. And the workforce in Brazil with about 100 people now. Wow. They are they’re all remote anywhere in the country. So there’s no physical location around Brazil. There is one here in Utah, but it’s a remote first. Like you don’t have to always come to the office. You come to the office if you want to or if you have a customer flying here. Like sometimes we do have customers fly for us to do like their two days workshop before we started a project.
Greg Alexander [00:15:29] Now, since culture is connected to the margin expansion that we’re talking about today, you have a remote workforce, remote first. Some would say you can’t build a culture in that environment. You’re clearly proving that not to be true. So is there anything about building culture in the remote workforce that’s different than building culture in an on prem situation?
Phil Alves [00:15:52] Yeah, I think you have to be a lot more intentional when you have a remote workforce, you have to really spend the time. Culture has to be a priority. You have to talk about culture. You have to. I have this thing called the Culture Squad and this people are their own responsibilities to make sure people are understanding and getting the culture and they’re holding events and they’re doing stuff because it’s harder. Like people get to know each other, but. I think there are some of the basic human needs there for fuel and go to the office that are not automatically fulfilled when you work remotely like you want to have connection and you want to have a couple of things that’s a little bit harder. You never want environment and we have been doing that before with Cool to do it so we know how to do it.
Greg Alexander [00:16:38] So tell me about the Culture Squad. I love that idea. So how many people are on the Culture Squad? What do they do for you? How does one earn a spot on the culture squad like that? That sounds like a fun a fun gig to have. Tell me about that.
Phil Alves [00:16:52] So it’s a select group. There’s probably like six or seven people in that group. They get kind of like once a month and they have a budget and their goal is to put together events and things that will promote the culture. So they usually they’re doing workshops where they’re not just themselves, they’re getting someone from the overall company to do a workshop. So they’re promoting their workshop and people are coming, they’re participating. They are like deciding who is the employee of the month and they are running surveys to figure that out. They’re looking at like the reviews that employers give to each other. They are looking at problems that we might have in the culture because like I told you before, I think culture is the good and is the bad and you have to realize when the bad is happening. And so they are responsible to to point that out. So like the leak thing, I didn’t notice that they brought to me and they’re like, hey, people are getting like and their solution was for me to go into the whole company to stop doing, but that sucks.
Speaker 3 [00:17:54] But they will.
Phil Alves [00:17:55] Figure out those problems and they will sometimes have ideas of how to address and how to shrink the culture in different ways. Like so they say, hey, this month we’re going to talk about simplicity, what, what, what, everything that we can do to, to get people to understand what simplicity is. And they’re going to share kids studies. They’re going to do whatever to to get people to understand and put their get to this what I decide. I personally like got together with my management team and we just got people from different areas of the company that really understood the culture to represent who we are and we put those people in their squad. Yeah.
Greg Alexander [00:18:33] You know, one thing you mentioned also was that you guys build SaaS products. That’s your core business. You know, every time you pick up the newspaper, turn on the TV, go online. These days, you know, talk about the SAS industry going through a tough time. Have what’s your take on that? Have you seen any any pull back and is that affected your business or not?
Phil Alves [00:18:53] No, that has an effect on our business. These are mostly public companies that were overall average, in my opinion. A lot of our customers, they’re like smaller in the B2B space. They are like running profitable business and they’re doing this just fine. And we have even more people that are coming to view their SAS products because they are an expert in a niche and they’re building a product for someone just like themselves. Yeah, like we just to start a product for a guy that has I think he has close to a bunch of car washes. I won’t say the number, I’ll say wrong. Well, let’s say more than 100 car washes in the whole country. And then he knows how to run car washes and he knows all the software out there are not great. So he wants to build a software for other business just like his. And of course, he’s very profitable and he’s going to be just fine to the recession or whatever is going to happen in the coming months.
Greg Alexander [00:19:44] And people still get to wash their cars.
Speaker 3 [00:19:47] Yeah, exactly. So.
Greg Alexander [00:19:50] All right. Well, that’s good to hear. I mean, I this is my second company collected 54. My first one was started during a different era back in 2006. And I can tell you, I’m rooting for the SAS industry because the ease that I can run my business now, I mean, I run my entire business off my phone and the cost to run my business has plummeted. And it’s because of all these fantastic SAS products that are available and just cloud computing, cloud computing in general. So I wish you much continued success. I love having you in the group. I love to hear that that a consulting company that specializes in software development can run healthy profits because of things like process and culture and playbooks, you know? And it’s a great counter-example to some who feel the space you operated in has been completely commoditized. So congratulations to you and all the success that you’ve had.
Phil Alves [00:20:44] Thank you very much. It’s great to be here.
Greg Alexander [00:20:46] Okay. All right. So for those are the listeners that are not a member. And you might think about joining because you want to meet really fun and exciting people like Phil go to Collective 54 dot com and you can fill out an application and be considered for membership. If you’re not ready to be a member, but you want to keep educating yourself and consuming content. The same website Collective 54 dot com. There’s a resources section and you can subscribe to insights. You get a weekly podcast blog. We produce a chart of the week, which is a visual representation of benchmarking data. We even have a bestselling book called The Boutique How to Start Scale and Sell a Firm. So I encourage you to to check that out as well. But that’s the end of this show. And thanks for listening. We’ll see you next time.